Market Wise Q&A: Short Sale Sours, then Bank Demands Promissory Note

Pat Kapowich for The San Jose Mercury NewsQ: We are completely at our wit’s end with a loan modification that failed miserably, and now with a Short Sale from hell. Everyone who made promises burned us, including the bank person in charge of our Short Sale. The bank is now demanding a promissory note for any short fall they incur. We don’t like our options. Isn't the whole idea of a Short Sale that the bank will accept the financial loss ~ and acceptable offer?

A: It was, until recently. The latest trend from the banking industry is that they are forcing many distressed properties into foreclosure when their negotiating gambit backfires. You just can't make this stuff up: The banks figured out that they can coerce distressed sellers into signing a promissory note(s) in order to approve a Short Sale, only to later turn them over to agencies or attorneys who specialize in collections. This is a special boon for the second loan holders who will initially receive pennies on the dollar, but later half of whatever a collection agent is able to recover. This current direction has already played out to the point where some recuperating former owners of distressed properties, who are already burdened with tax ramifications of mortgage debt relief, start receiving collection calls, too.

However, distressed sellers who call the banks’ bluff simply let the property go straight into foreclosure. Literally months of the work by the sellers and the real estate community that was invested in obtaining a purchase offer is squandered. This isn’t the banks’ “shadow inventory”; it is the banks’ deliberate inventory. Lenders’ wrestling a distressed property from a Short Sale/Closing to a Foreclosure needlessly ruin neighborhoods and prolong our housing recovery.

Ever since property values were drastically rolled back, due to a lender-induced financial crisis, millions of homebuyers like you who spent years saving up for a down payment and honestly filled out a loan application, only to lose it all, are overlooked. Now, many banks are treating all distressed homeowners as fraudsters by attempting to hoodwink them into paying for their loss, also.